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The purpose of this project is to design a pilot survey to investigate why surveys that ask willingness-to-accept compensation questions so often yield unreliable data and whether respondents would find alternate modes of compensation (specifically, pubic goods) more acceptable. The study will include both a theoretical discussion of why individuals may react negatively to offers of cash compensation and empirical results from the survey testing the hypothesis that individuals will prefer public goods as compensation and that the responses to public good compensation questions will be more stable than the responses to cash compensation questions. The survey will focus primarily on the problem of determining the proper level of compensation for host communities when siting noxious facilities. Information from the pilot survey will be used to try and improve willingness-to-accept surveys and the siting process for noxious facilities.

Duke University, Nicholas School of the Environment
Research Triangle Institute
Duke University, Fuqua School of Business

Funding Agency/Program:

EPA/ORD/Valuation

Grant Year:

1995

Project Period:

October 1995 - April 1997

Cost to Funding Agency:

$51,402

Project Status Reports:For the year 1997Objective: Attempts to measure the amount of compensation individuals will demand (their willingness to accept, WTA) for reductions in a public good, such as environmental quality, frequently produce unreliable data. We argue that perceptions of cash as a bribe, difficulties in mentally trading cash for public goods, and other psychological reactions to cash may be responsible for the difficulty in eliciting WTA.

We test the hypothesis that individuals will be more receptive to public goods as compensation, such as parks or schools. Each question in our survey offers respondents three options: receipt of cash as compensation for allowing a decline in environmental quality, receipt of a public good as compensation, or a choice between cash and the public good. Comparing the response rates to the three options will provide evidence about people's preferences over types of compensation.

Progress Summary: Preliminary results, presented in Table 1 on the following page, suggest that even when the cash was worth more to the individuals than the public good in a simple choice framework, they were more likely to accept compensation in the form of a public good when faced with a "public bad" such as a landfill or noise from the local airport that would impact on their entire community. In the first row of Table 1 (column 5), a majority of the respondents choose cash savings over the public good when given the choice of houses, indicating that in a neutral market setting the cash was worth more than the public good to a majority of the respondents. However, more respondents were willing to accept the public good as compensation for the public bad than cash (columns 2 and 3). In the other two questions concerning airport noise and a livestock farm, the number of respondents who accepted cash compensation as a fraction of the total number who accepted compensation in either compensation question (column 4) is lower than the percentage of people who choose cash in the choice question (column 5). Again this suggests that when people are asked whether they would accept compensation to allow a decline in environmental quality, they prefer public goods to cash.

Our results have implications for a number of policy issues, including the siting of noxious facilities such as landfills or solid waste incinerators. The siting process is often contentious and difficult. Surveys such as the one we are developing could improve the process by identifying the preferred type of compensation for host communities.

Future Activities: The next step in our project is to refine the survey before implementing the final version. If our results continue to suggest that individuals prefer public goods as compensation, then additional research will be needed to determine more specifically why this is so and whether people prefer certain types of public goods. Finally, we hope to work with policy makers to produce a survey that could be used to aid actual siting decisions.

Table 1. Cash Versus Public Goods as Compensation.

*The question offered individuals the choice between two houses – one with lower property taxes and one located near a public good, such as a park. This choice provides us with information as to whether the public good is worth more or less to the individual than the cash savings.

Project Reports:Final Executive SummaryObjective: Measuring the amount of cash individuals are willing to accept as compensation for a loss of utility through survey methods has proved difficult, and cash compensation often is ineffective in winning public support for projects such as siting noxious facilities. We believe that offers of cash compensation can be perceived as bribes or as being otherwise unacceptable by a large number of people. We hypothesize that many individuals will find public goods (We refer to "public goods", however it would be more accurate to say "publicly provided goods." Most of the goods to which we refer are not pure public goods, but neither are they private goods. They are, however, provided to a community by the government or a company. Examples include parks, community recreation centers, and trees and wildflowers planted on the side of the road.) to be a more acceptable form of compensation than cash. Researchers have identified factors such as the bribery effect, impure altruism, and feelings of moral responsibility that may influence how a respondent reacts to an offer of compensation. Taken as a whole, the literature supports the hypothesis that individuals prefer public goods to cash as compensation.

The hypothesis is that money may be the wrong "good" to use when asking respondents to make compensation trade-off's involving environmental public "bads." First, there is good reason to believe that accepting money may be perceived as a form of bribery (Frey, et al., 1996; Moffitt, 1983). In other words, monetary compensation is tainted by the appearance that the respondent is being bought off for private gain at the expense of the entire community. For this reason, a public good was chosen as an alternative form of compensation. Second, money is a private good, whereas most CV surveys are designed to value goods with public good characteristics. It is very possible that respondents have difficulty trading off dissimilar goods. Viscusi, Magat, and Huber (1991) found that responses to risk/risk trade-offs were more stable than risk/dollar trade-offs. Therefore, the distinction between public and private goods could be critical. The intention is to circumvent some of the problems typically associated with traditional WTA questions--namely, unreasonably high derived monetary values and high protest and non-response rates.

Summary/Accomplishments

To test this hypothesis, we conducted a survey in which respondents were confronted with a variety of scenarios and offered either cash compensation or compensation in the form of various public goods. This compensation is in return for accepting something undesirable (a public "bad"), such as a noisy road, or a livestock farm close to their property. We find evidence that public goods become more valuable relative to cash as respondents move from a neutral market framework to a compensation framework.

In total, we collected data from three main samples of respondents. Respondents to the three surveys received somewhat different surveys, however each survey started with attitude questions, followed by choice questions and finishing with demographic questions.

The choice questions are the focus of our study. We designed a series of different scenarios in which respondents made one of the following choices: (1) whether to allow the siting of a noxious facility (or other public bad) in exchange for cash compensation; (2) whether to allow the siting of a noxious facility (or other public bad) in exchange for a public good as compensation; (3) a choice between cash and public good compensation; and (4) a choice between two houses. The questions included a description of a scenario in which a noxious facility or some other public bad was going to be sited in the respondents' neighborhood, including some details about the potential problems associated with the facility. The following section describes the choice questions.

Willingness to Accept Compensation. Our first set of questions asked individuals if they were willing to accept (WTA) cash as compensation for the siting of a noxious facility or other public bad in their neighborhood, where all the respondents were offered the same amount of money. The respondents could accept the compensation and the public bad, or they could reject the public bad and the compensation. Respondents will accept the offer of cash compensation if the utility they receive in that situation is higher than the utility they currently receive.

An identical question was posed to a different sample of respondents, but this time the respondents were offered a public good as compensation. Again the respondents will accept the compensation if the offer increases their utility.

A Choice of Compensation. In the choice of compensation questions, the scenario described a situation in which a noxious facility or public bad was going to be sited in the individual's neighborhood, and she was offered a choice between cash compensation and a public good. This question differs from the willingness to accept compensation questions because the respondents cannot stop the siting of the noxious facility in their neighborhood. The facility will be sited in their neighborhood, and they can choose the type of compensation they would like to receive.

Neutral Market Choice. In the neutral market choice, the respondents choose between two houses. There are similar noxious facilities located near both houses, but one house has lower property taxes and the other is located near a public good. It is important to note that the underlying choice is exactly the same as a choice of compensation, however the question is framed as a market choice between two houses. In this question, the noxious facility has already been sited, and the respondent was not involved in that siting decision. The respondent arrives after the fact and decides which house to buy.

Data Collection. We collected data from three different samples. The first survey (Church) was conducted through local churches in the fall of 1996. The paper and pencil surveys were distributed by the church with pre-addressed, postage paid envelopes for return. A total of 160 surveys were collected. The second two surveys (Mall 1 and Mall2) were self-administered computer surveys using a mall-intercept format conducted in the summer and fall of 1997 (Several studies have found that mall intercept surveys yield samples that are similar to telephone surveys. See Boyle, et al., 1996). The sample size for Mall 1 was 202 respondents, while Mall 2's sample size is 265. To participate in the surveys, respondents had to be over 20 years of age, own or rent their own home or apartment, and not be a full-time student (The assumptions for this calculation are similar to those of the Luce choice model, of which the multinomial logit is a special case. This model relies on the Independence of Irrelevant Alternatives axiom (see Maddala, 1983, p. 59-62)).

In general, the Church respondents are older and have higher incomes than the other two samples. The Mall 2 survey has a slightly higher income distribution than Mall 1, but the respondents are significantly younger.

Results. In Table 1, we present the results from questions comparing individuals' willingness to accept the noxious facility with either cash or a public good as compensation with a neutral market choice between two houses. Column 2 reports the percentage of respondents who were willing to accept the cash compensation in exchange for allowing the noxious facility to be sited in their neighborhood. Column 3 reports a similar percentage of respondents who were willing to accept a public good as compensation.

The results from the neutral market choice question are presented in Column 5. In all cases except one 50 percent or more of the sample choose the house with lower property taxes (the cash) over the public good in the neutral market choice question.

How can we use the information in Columns 2, 3, and 5 to determine whether the value of the public good changed relative to cash? The responses to the compensation questions in Columns 2 and 3 were used to predict the percentage of the sample that would prefer cash to the public good in a direct comparison using a simple odds ratio. That is, we take as our null hypothesis that the ratio of the odds of accepting cash in Column 2 to the odds of accepting the public good in Column 3 will be the same as the ratio of those preferring cash to the public good in Column 5. If the relative value of cash and the public good was the same in both a compensation and a market setting, there would be no reason to suspect that this simple prediction would be systematically biased in one direction or the other.

Comparing the predicted percentage who would prefer cash to the public good in Column 4 to the actual percentage who chose cash in the market choice question, Column 5, in all cases except one we under-predict the number of people who will prefer cash to the public good in the market choice question. The results from the compensation questions in Columns 2 and 3 suggest that the public good is more valuable in the compensation setting than in the market settingūwe under-predict the number of people who would choose cash in the market setting.

In the final set of questions, we compare responses to the choice of compensation question with the neutral market choice. Again, each respondent answered only one of these questions. From Table 2, comparing the percentage who preferred cash to the public good in the market setting, Column 2, with the percentage who preferred cash in the compensation setting, Column 3, we find very little difference. Although an equal or greater percentage of the respondents chose cash in the market choice compared to the choice of compensation, the numbers are not significantly higher.

Why do we find a difference between the results in Table 1 and Table 2? In the two choice questions (market choice and choice of compensation), the respondents have no control over whether the plan for the public bad is carried out. This framing may remove or diminish the guilt or bribery effect associated with taking the compensation to allow something bad to happen in your neighborhood. In contrast, the respondents can vote to stop the public bad from being sited by refusing the compensation in the traditional WTA questions. This suggests that it may be the ability to reject the project in the willingness to accept compensation questions that causes the feelings of guilt and the negative reaction to cash compensation.

Conclusions:

Over a variety of situations, with different public goods, different problems, and across different samples of respondents, we find evidence that public goods become more valuable relative to cash in a compensation setting.

On a practical level, our results suggest that it may be easier to site noxious facilities if public goods are offered as compensation. Obviously, not every public good will be suitable. Care should be taken to elicit public preferences for the type of public good. Compensation is only one part of the siting process, however it is an important part and suggestions by economists for improving the siting process include compensation (Swallow, Opaluch, and Weaver, 1992; Kunreuther, et al., 1987). If public goods are cheaper to provide than cash compensation, then public good compensation will be much more attractive to the suppliers of the noxious facilitiesūthe company or municipality that must construct the public bad. Depending on the size of the affected population and the number of years payments would be made, it could be substantially cheaper to provide a public good as compensation.

On a more general level, our results highlight the importance of context to decision making and preferences. The relative value of cash and a public good may depend on the situation in which the individual makes the decision. For a given individual, there is no one value that is unique to each good. The value of a particular good changes as circumstances change. Our results, taken in the context of the broader literature, imply that values obtained in one setting may not translate to a different setting. Further research is needed to investigate more fully the reasons why individuals view goods differently in different situations, however the basic conclusion will only make the work of economists interested in measuring the costs and benefits of policy more difficult.

Publications/Presentations:

Mansfield C, Van Houtven G, Huber J. Guilt by association: compensation and the bribery effect. Presented at the First World Congress of Environmental and Resource Economists, Venice, Italy, June 1998.

Table 1: Acceptance rates for cash and public goods vs. market choice between cash and public good

Scenario

(2)

(3)

(4)

(5)

(6)

(Sample)

% WTA cash4

% WTA

Pairwise

Pairwise actual

Public good

public good5

expected

probability -

surplus8

probability -

prefer cash7

prefer cash6

Landfill (Church)

13%

19%

39%

60%

135%

Landfill (Mall 1)

56%

36%

69%

89%

258%

Landfill (Mall 2)

35%

35%

50%

56%

27%

Livestock (Church)

20%

28%

39%

50%

56%

Livestock (Mall 1)

61%

51%

60%

75%

100%

Livestock (Mall 2)

53%

52%

51%

73%

160%

Airport (Church)

15%

24%

36%

44%

41%

Airport (Mall 1)

57%

45%

62%

60%

-7%

Airport (Mall 2)

26%

44%

31%

45%

83%

Radio tower (Mall 1)

65%

64%

51%

68%

103%

Radio tower (Mall 2)

39%

39%

50%

54%

17%

4Percentage of respondents who answered "yes" they would be willing to accept the cash payment to allow the disamenity to be sited in their neighborhood.

5Percentage of respondents who answered "yes" they would be willing to accept the public good to allow the disamenity to be sited in their neighborhood.

6Expected percentage who will choose cash over public good = $odds / ($odds + PGodds) where $odds = (2)/[1-(2)] and PGodds = (3)/[1-(3)].

7Actual percentage who chose cash (the house with lower property taxes) over the public good (the house located near a public good).